The S&P 500 Index closed for the week ending Friday, October 10, 2014 at 1906.13. Three moving averages are in play that may provide important signals determining the potential future direction of the market at this important juncture.
 
The 200 day simple moving average has been utilized by some money managers as a barometer reading whether the market is in a bull or bear trend. If there is a decisive close below the average, some participants in the market may consider this to be a sell signal or a signal to become defensive in one’s stock portfolio allocation. This average is also known as a potential support area which may halt declines in the market averages. On Friday, 200 day rested at 1905.22, just under the market close for the day. Thus, some observers might say that we are due for a bounce or rally in the market if the 200 day holds as support.
 
That may or may not happen, but is there reason for concern about the S&P’s downside risk on a more long term basis – even if support holds here for a while? On a longer term basis, the 40 week and the 10 month simple moving averages are used by many market participants to determine the potential longer term direction of the market based on a weekly or monthly close below the moving average. The record is good in protecting portfolio gains from large draw-downs if one exits the market upon these signals.
 
The S&P 500 index closed on higher volume just a hair below the 40 week moving average for the trading week ending on last Friday. This may be construed as a more intermediate to long term potential sell signal for the market. We may be in store for a continuation of the correction – or possibly a full blown bear market should current support not hold in an enduring manner. I would expect support to offer some limited solace to the bulls at this level.
 
Now, a monthly close below the 10 month simple moving average has in the past signaled dramatic bear markets such as occurred right before the 2007-2008 financial crisis. On Friday we closed just below the 10 month for the day. Should the full month’s close find itself below the average, then that may indicate confirmation that a long term top may be in place in the S&P 500. This has not occurred yet, but we will on guard for such an event.